September 8, 2006
TO: The Chief Executive Officer of Each Licensed Mortgage Broker, Mortgage Lender and Each State-Chartered Financial Institution
SUBJECT: Recent Enforcement Actions and Violations
Recent regulatory action taken by the Division which has been well chronicled in the media and violations found by examination personnel during recent on-site examinations necessitate this industry letter reminding entities of required lending practices as well as the entities' responsibility for their mortgage employees and those individuals acting under their direction. Entities and particularly licensed mortgage brokers and lenders are again warned that it is their license as well as the management of the entity that is at risk of severe regulatory action provided in statute for the practices of any individual acting under their license or charter. The Division will not tolerate and will take immediate action against an entity which allows or is complicit in allowing inaccurate or unreliable if not fraudulent information and documents to be placed into the mortgage system.
Many but not all of the most egregious violations have involved reduced documentation loans. Such mortgage loans have existed for many years and typically do not require the verification of a borrower's income. (For the purpose of this letter, reduced documentation mortgage loans include stated income loans, NINA (no income, no asset) information loans, NIV (no income verification) loans, no ratio loans, and low and no documentation loans.) In the past, these loans were limited in their availability and utilized primarily by certain consumers who, among other things, had excellent credit histories, could make sizable downpayments and had other assets. Over the last few years, with the continued development of the subprime market, reduced documentation mortgage loans are being more frequently marketed to individuals that marginally qualify for mortgage credit and do not have other mitigating factors as described above.
With homeownership becoming increasingly difficult, especially for first time buyers, the mortgage lending industry has responded by offering a broader array of loan products. However, such products must be coupled with the basic tenets of a legal transaction and sound underwriting practices. For any mortgage product, prudent underwriting necessitates that the level of documentation required be commensurate with the risk profile of the borrower and a common sense analysis of the information provided. If concerns arise, due diligence dictates that additional documentation be obtained. Entities:
- Have a responsibility to ensure that stated income is accurate. Entities should have procedures in place to review stated income to ensure it is reasonable given the borrower's occupation. If applicable, an entity must utilize procedures to verify employment.
- Must have underwriting policies that ensure all risks associated with reduced documentation mortgage loans have been identified and that adequate controls are in place to ensure sound lending practices and full compliance with all applicable laws and regulations as well as in accordance with all secondary market requirements.
- Must ensure that third parties involved produce loans that are adequately documented and free of fraud or other problems and adhere to the institution's policies. Once a single problem is detected, an entity must take immediate action to investigate and to terminate the relationship with that third party provider if appropriate.
The Division, through its examination force as well as its investigation of consumer complaints, will continue to take immediate and severe action against an entity for any mortgage loan transaction including a reduced documentation loan upon finding or obtaining any evidence:
- That income was intentionally overstated by the entity;
- That borrowers were encouraged to overstate income;
- That consumers were steered from a conventional, full documentation loan to a reduced documentation loan because the consumer did not have the income to qualify for a full documentation loan;
- That an application was processed where the entity had reason to believe that the income provided was not accurate or the source of the income originates from individuals not listed on the application; or
- That an application was processed where the entity had reason to believe that the borrower's income was insufficient to repay the loan.
The Division cannot over emphasize the seriousness of the matters discussed herein or the recent regulatory action taken. Violations of law have the effect of undermining the entire mortgage industry including all constituent parties. These practices can:
- Ruin a consumer both personally and financially;
- Destabilize neighborhood home values;
- Adversely impact the purchase and sale of real estate;
- Put an entity at significant risk both reputationally and otherwise; and
- Affect the willingness of investors to purchase loans.
The severity of the violations and enforcement actions taken significantly call into question the existing statutory framework's lack of licensing mortgage loan officers and mortgage loan originators in the Commonwealth.
Moreover, such practices necessitate that the Division implement other measures to address these matters. You will be informed of those additional actions.
Should you have any questions with regard to this letter, please feel free to contact Chief Risk Officer John M. Prendergast at 617-956-1534.
Very truly yours,
Steven L. Antonakes
Commissioner of Banks